Following up on our earlier discussion today of wages and consumer spending is this WSJ column (from earlier this week) on wage growth, or more specifically, the lack thereof:
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WSJ: "The recession in the U.S. has been over for more than three years. The economy has been growing at better than a 4% annual clip for the past two. Profits, at least until recently, have been up. Growth in worker productivity has remained strong. Unemployment has fallen to 5.2%, the lowest since September 2001.
Yet wages for the typical worker aren’t even keeping up with inflation. Wages are growing unusually slowly for this point in the economic cycle, especially given persistently strong growth in productivity, the goods and services produced for each hour of work.
The U.S. Labor Department says that hourly wages for private-sector workers who aren’t bosses rose 2.6% to nearly $16 an hour between March 2004 and March 2005, which is short of the 3.1% increase in consumer prices over that period. Weekly paychecks are up a bit more, but only because workers are putting in more hours. The department’s broader Employment Cost Index, which covers more workers, says wages and salaries rose just 2.4% last year, well shy of last year’s 3.3% increase in prices."
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BLR: The simple observation is that there has been no wage growth because there is so much post-bubble slack in the labor market. Then add some outsourcing, productivity growth, and migration of manufacturing work (with nothing in site to replace them). Thats a very tough environment.
But from a market perspective, here’s the even bigger problem: While prices have been pressured upwards in just about everything: from Energy to Food to Housing to Commodities to Healthcare to Education. It seems the only sector of the economy that is not experiencing price increases is personal income and wages.
This is significant for the markets because consumer spending is ~2/3rds of the economy. And, I see little evidence of any new upsurge in corporate spending, especially with the demise of ADCS. Making matters worse is that the consumer is becoming increasingly extended, and the corporate CapEx remains moderate (at best).
Further, the labor market may be even weaker than it appears (and we’ve been beating that drum for a year now):
"Harvard University economist Lawrence Katz estimates that wages have been growing about two percentage points shy of the increase in productivity during the past four years.
That suggests the American labor market is weaker than the falling unemployment rate makes it appear. Other numbers confirm that. Employers still aren’t hiring readily. More than one in five unemployed Americans has been out of work for six months or more. Lots of workers remain on the sidelines: About a third of all adults are neither working nor looking for work, more than usual. "Apparently, the demand for workers has been strong enough to allow many of those actively looking for jobs to find them but not strong enough to pull people back into the labor force who may have dropped out — perhaps for early retirement or additional schooling," U.S. Federal Reserve governor Donald Kohn suggested in a recent speech."
The question then, as Mr. Katz frames it, is: "Why are firms so reluctant to hire given the strong growth in productivity and, until very recently, the surge in profits?" He suspects that employers are so uneasy about so many things — energy prices, interest rates, the effect of the budget deficit, the dollar — that they remain unusually hesitant to add workers permanently, though there has been an upturn in hiring of temps. Some business executives add that regulatory, auditor and press scrutiny after recent scandals continues to discourage business.
What then, is it that will keep this expansion going, with wage growth trailing inflation, increasing consumer indebtedness, and little in the way of organic job creation?
I’m damned if know. And that, in a nutshell, is the key problem of a stimulus driven expansion in this post bubble environment.
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Source:
Workers’ Wages Trail Growth in Economy
David Wessel
April 21, 2005; Page A2
http://online.wsj.com/article/0,,SB111404853674112856,00.html
“Why are firms so reluctant to hire given the strong growth in productivity and, until very recently, the surge in profits?”
I think I mentioned this in your last post about this, but it bears repeating.
Modern day employers don’t hire because “productivity is increasing”. They hire because they have work that needs to be done. Period. What these people are thinking of is the old days, where utilization was near 100%, and the only way to increase production was to hire more people.
Not anymore. In a service based economy, there’s generally slack when it comes to utilization. So a manager that’s taking care of 400 people, do double it to 800 people might take 1/10th the additional work of having two people do it. It’s that drastic.
So I guess what I’m saying, is that any discussion about “productivity” would better be aimed towards discussing utilization and demand for labour. And that’s just dropping like a rock.
Productivity growth does not propel employment, demand does. There was excellent productivity growth during the Depression, the problem has always been generating demand.